A Rise in Bond Yields Triggers Stock Buyer Fatigue

A strong week for Wall Street wrapped up on a quieter note, with stocks hovering close to record levels and bond markets under pressure as fresh consumer data did little to sway expectations that the Federal Reserve will deliver a rate cut in September.

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After an impressive run higher, the S&P 500 ended the week with minimal movement. Meanwhile, the IPO market came alive, generating more than $4 billion in deals its most active stretch since 2021. Large-cap stocks gained ground Friday, powered by Tesla Inc., while vaccine makers dropped following reports that health officials are preparing to link Covid shots to the deaths of roughly two dozen children.

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In fixed income, Treasuries pulled back modestly after advancing for four consecutive weeks. The dollar also recorded its steepest weekly decline in about a month. On the economic front, consumer sentiment weakened to its lowest level since May, while long-term inflation expectations ticked higher. Recent labor data has reinforced the view that the job market is losing momentum, strengthening investor conviction that the Fed will deliver at least three rate cuts before year-end.

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“The Fed is being pulled in opposite directions persistent inflation on one side, and a weakening labor market on the other,” explained Bill Adams of Comerica Bank. “The focus now isn’t whether cuts are coming, but how deep they will go.”

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A News survey of economists echoed that view. While the median forecast points to two cuts this year, more than 40% of respondents anticipate three. Most analysts expect the first reduction to arrive as soon as next week.

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Deutsche Bank economists adjusted their projections as well. The group now expects three rate cuts in 2025, revising an earlier call that saw a September cut followed by a long pause until December.

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Morgan Stanley economists, led by Michael Gapen, are even more aggressive. They predict four consecutive cuts, with policymakers likely taking a breather afterward to evaluate inflation trends before resuming reductions in April and July.

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As for messaging, analysts at TD Securities expect the Fed’s tone to tilt dovish at the upcoming meeting, largely because of labor-market concerns. Still, they caution that inflation risks could prevent policymakers from being overly accommodative. The September Summary of Economic Projections (SEP), they argue, will probably continue to show two cuts penciled in for 2025 but may nudge inflation forecasts slightly higher.

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“The actual rate move won’t shock anyone,” said TD strategists Oscar Munoz and Gennadiy Goldberg. “The bigger story is Powell’s hesitancy and the dots’ hesitancy to firmly commit to additional cuts. That could be read as less dovish than markets expect.”

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Ian Lyngen of BMO Capital Markets expects a 25-basis-point cut, paired with language and projections that lean dovish overall. He anticipates the 2025 dot plot will reflect the likelihood of additional 25-basis-point reductions in both October and December.

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At Bank of America, strategist Michael Hartnett argued that financial markets see the Fed as acting “ahead of the curve.” He pointed to a rally in bank stocks, strength in rate-sensitive sectors, and tightening credit spreads as evidence investors believe the central bank can cut without undermining its credibility and even stimulate growth in the process.

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Still, cash remains king. According to EPFR Global data cited by BofA, money market funds pulled in $266 billion over the past four weeks. U.S. equities, on the other hand, saw $19 billion in outflows during the same period.

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Even so, equities appear poised to push higher in the near term, according to Mark Hackett at Nationwide. “Rate cuts would join a long list of tailwinds from fiscal stimulus and trade agreements to the earnings boost from a weaker dollar,” he said.

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One of the week’s defining features was the surge of IPO activity. Investor demand proved robust across all new offerings, with many companies selling larger stakes than initially planned. On average, the listings opened 31% above their offering price, according to Bloomberg data.

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Despite this surge, the IPO market is still finding its footing after years of turbulence. U.S. exchanges have raised about $29 billion through September 12, which is below the decade-long pre-pandemic average of $31.4 billion and well short of the extraordinary levels seen during the 2020–2021 boom.

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